S&P Downgrades Four Main Greek Banks From B To CCC On Deposit Flight Concerns And, Well, General Bankruptcy Fears
- We are of the view that Standard & Poor's rated Greek banks' financial profiles are exposed to significantly heightened risks as a result of deterioration in Greece's creditworthiness and Greek depositors' perceptions of a possible government debt restructuring.
- As a consequence, we are lowering our long-term counterparty credit ratings to 'CCC' from 'B' on the four Greek banks we rate.
- The negative outlook reflects the possibility that the banks could be downgraded again if we believe the banks are likely to default on their obligations as defined by our criteria.
On June 15, 2011, Standard & Poor's Ratings Services lowered its long-term counterparty credit ratings to 'CCC' from 'B' on four Greek banks--National Bank of Greece S.A. (NBG), EFG Eurobank Ergasias S.A. (EFG), Alpha Bank A.E. (Alpha), and Piraeus Bank S.A. (Piraeus). We have also affirmed our 'C' short-term ratings on the banks and our 'CCC-' issue ratings on their hybrid securities.
The ratings were removed from CreditWatch with negative implications, where they were placed on Dec. 3, 2010. The outlooks on all four banks are negative.
The downgrade reflects our view that the four banks face significantly heightened risks to their financial profiles, particularly in terms of their liquidity from domestic retail operations (comprising domestic enterprises and households) and their capital positions. We believe the Greek banks face relatively short-term risks of pressure on their domestic retail funding as the public considers the implications of Greece's need for additional funding from official creditors and the framework under which this funding could be provided--which, according to currently available information, we believe could include a potential restructuring of public debt that would result in one or more defaults as defined by our criteria (see "Long-Term Sovereign Rating On Greece Cut To 'CCC'; Outlook Negative," published on June 13, 2011).
In our view, outflows of domestic deposits could conceivably continue to intensify depending on the public's view of the impact that Greece's deteriorating creditworthiness may have on the banking system. The downgrade also reflects the significant risks to the Greek banks' capital bases that we believe may arise should the government restructure some, or all, of its debt.
We observe that domestic customers of Greek banks have demonstrated their sensitivity to signs of deterioration in the sovereign's creditworthiness. This is evidenced by the sizable outflows of deposits from the whole system over the past 18 months. According to Bank of Greece's latest published data on system deposits, domestic deposit outflows from corporations and households for the system amounted to €13 billion in the first four months of 2011 (or 5% of the system's domestic deposit base as of year-end 2009), compared with €28 billion during the whole of 2010 (or 12% of the system's domestic deposit base as of year-end 2009). In this context, we think that retail funding pressures could intensify further in the short term as debate on the possibility that Greece's government debt could be restructured continues, with domestic political controversy around the accompanying policy conditions that could be imposed.
We note that European Central Bank (ECB) collateralized funding represented most of rated Greek banks' nonretail funding as at March 30, 2011. This is the result, in our view, of Greek banks' continued severe difficulties in accessing wholesale funding markets in the past few years. As a result, Greek banks have mainly resorted to the ECB to refinance deposit outflows since end-2009, the accumulation of government debt portfolios, and wholesale debt maturities.
Our ratings on the four Greek banks incorporate our view that, within the EU framework, the Greek authorities are "supportive" of Greece's financial system. Consequently, our assessment of the stand-alone credit profiles (SACPs) of the Greek banks takes into account what we consider to be the benefits of a regulated and supervised environment, with access to extraordinary liquidity, such as that provided under the Greek government's support package and by the ECB.
In our ratings we therefore take into account that rated Greek banks still have some cushions of assets that are eligible and available for discount at the ECB, as well as access to the €30 billion additional liquidity buffer (equal to about 15% of the system's domestic deposit base) provided by the Greek government under the third pillar of its support package available to all Greek banks. We believe that existing eligible assets at March 30, 2011, and our estimate of amounts to be allocated from the €30 billion liquidity buffer, would represent about 30% of domestic deposits at March 30, 2011 for EFG, Alpha, and Piraeus and about 20% for NBG at the same date.
At present, we are not aware of any potential extraordinary mechanisms (other than the above-mentioned €30 billion liquidity buffer and the lender of last resort facility) that could be tapped to provide additional liquidity should further deposit outflows exceed the banks' capacity to access the ECB collateralized facility. Therefore, we do not incorporate into our ratings the potential benefits from any such additional extraordinary liquidity support measures.
In our view, rated Greek banks are directly and significantly exposed to Greece's deteriorating creditworthiness through their large portfolios of Greek government bonds, accounting for more than 200% of Tier 1 capital for NBG and Piraeus, about 170% for EFG, and 80% for Alpha at year-end 2010. We think that the impact of a potential government debt restructuring on these banks' capital bases, the likelihood of which we believe is increasing, would depend largely on the terms and conditions of the restructuring, as well as any eventual regulatory forbearance. Although it has yet to be decided whether there will be a restructuring, and, if there is, what the accompanying terms and conditions will be, we note that the magnitude of the rated banks' exposure to government debt relative to their capital bases means that a potential government debt restructuring could potentially render the banks insolvent in some of the more negative scenarios.
We also believe that the Greek banking system as a whole, including the four rated banks, faces other relatively less imminent, but not less significant, risks. Greek banks' financial profiles--particularly their asset quality and profitability--are susceptible to the negative economic environment and the rapidly deteriorating operating framework. This is a consequence of continuing recession in Greece since 2009, which we believe may persist into 2012, with growing unemployment, at 16.2% in March 2011, up from 11.6% in March 2010. We also believe that it is likely that the public perception of an increased likelihood of government debt restructuring could have a further negative effect on private-sector borrowers' willingness to pay their debt,
particularly in the context of the Greek private sector's comparatively weaker payment culture than in other developed economies.
The 'CCC' long-term ratings on the four Greek banks signal our view that the risk of default, as defined under our criteria, within the next 12 months has increased significantly. The negative outlook reflects the possibility of a further downgrade if we believe that these Greek banks will default on their obligations as defined by our criteria. We note that some of the risks that the rated Greek banks face, and that could precipitate default at least on some of their obligations, are relatively imminent. Considering what we see as a meaningful possibility of default, there is an inherent negative CreditWatch associated with 'CCC' ratings (see General Criteria "How Standard & Poor's Uses Its 'CCC' Rating," published Dec. 12, 2008 on RatingsDirect).
Thus we may downgrade the ratings if we come to the view that rising pressure on the banks' retail funding bases is likely to lead to an outflow of deposits that may end up exceeding their liquidity cushions available for the ECB discount facility and liquidity from other extraordinary mechanisms is not available. This could lead us to conclude that rated Greek banks are likely to default as defined under our criteria.
We may also downgrade the ratings if we believe that the banks are likely to default, as defined by our criteria, due to any developments associated with a material impairment of their solvency. This includes the materialization of losses on their large holdings of Greek government bonds in the context of a potential government debt restructuring, a sharp increase of credit losses arising from lending portfolios, and/or significant earnings deterioration.
The outlook could be revised to stable if the risks we see to these four Greek banks' financial profiles abate, and/or if rated Greek banks benefit from extraordinary support mechanisms that we believe are likely to allow them to survive the materialization of these risks without defaulting on any of their obligations.